Question

Williams Company is a manufacturer of auto parts having the following financial statements for 2021-2022. Balance Sheet December 31 2022 2021 Cash $ 261,000 $ 136,000 Accounts receivable 151,000 226,000 Inventory 386,000 176,000 Total current assets $ 798,000 $ 538,000 Long-lived assets 1,650,000 1,510,000 Total assets $ 2,448,000 $ 2,048,000 Current liabilities 212,000 185,000 Long-term debt 900,000 810,000 Shareholders’ equity 1,336,000 1,053,000 Total debt and equity $ 2,448,000 $ 2,048,000 Income Statement For the years ended December 31 2022 2021 Sales $ 3,510,000 $ 3,610,000 Cost of sales 2,520,000 2,620,000 Gross margin 990,000 990,000 Operating expenses* 501,000 439,000 Operating income 489,000 551,000 Taxes 195,600 192,850 Net income $ 293,400 $ 358,150 Cash Flow from Operations 2022 2021 Net income $ 293,400 $ 358,150 Plus depreciation expense 65,000 55,000 + Decrease (−increase) in accounts receivable and inventory (135,000) − + Increase (−decrease) in current liabilities 27,000 − Cash flow from operations $ 250,400 $ 413,150 *Operating expenses include depreciation expense. Additional financial information, including industry averages for 2022, where appropriate, includes: 2022 2021 Industry 2022 Capital expenditures $ 120,000 $ 110,000 Income tax rate 40% 35% 35.0% Depreciation expense $ 65,000 $ 55,000 Dividends $ 49,000 $ 49,000 Year-end stock price $ 2.35 $ 3 25.00 Number of outstanding shares 1,810,000 1,810,000 Sales multiplier 1.50 Free cash flow multiplier 18.00 Earnings multiplier 9.00 Cost of capital 5% 5% Accounts receivable turnover 11.10 Inventory turnover 10.50 Current ratio 2.30 Quick ratio 1.90 Cash flow from operations ratio 1.20 Free cash flow ratio

Answer 1

Williams Company's 2022 valuation: Book Value of Equity $1,336,000, Market Value of Equity $4,255,000, DCF Valuation $5,008,000, Enterprise Value $4,894,000, and Multiples-Based Valuations (Earnings $2,640,600, Free Cash Flow $4,507,200, Sales $5,265,000).

Business Valuation for Williams Company (2022):

1. Book Value of Equity:

`\[ \text{Book Value of Equity} = \text{Total Shareholders' Equity} = \$1,336,000 \]`

2. Market Value of Equity:

`\[ \text{Market Value of Equity} = \text{Year-end Stock Price} * \text{Number of Outstanding Shares} \] \[ \text{Market Value of Equity} = \$2.35 * 1,810,000 = \$4,255,000 \]`

3. Discounted Cash Flow (DCF):

`\[ \text{DCF Valuation} = \frac{\text{Free Cash Flow} * (1 + \text{Growth Rate})}{\text{Discount Rate} - \text{Growth Rate}} \]`

Assuming a perpetual growth rate of 0%, the DCF valuation simplifies to:

`\[ \text{DCF Valuation} = \frac{\text{Free Cash Flow}}{\text{Discount Rate}} \] \[ \text{DCF Valuation} = (\$250,400)/(0.05) = \$5,008,000 \]`

4. Enterprise Value:

`\[ \text{Enterprise Value} = \text{Market Value of Equity} + \text{Long-term Debt} - \text{Cash} \] \[ \text{Enterprise Value} = \$4,255,000 + \$900,000 - \$261,000 = \$4,894,000 \]`

5. Multiples-Based Valuation:

- Earnings Multiple:

`\[ \text{Earnings Valuation} = \text{Net Income} * \text{Earnings Multiple} \] \[ \text{Earnings Valuation} = \$293,400 * 9.00 = \$2,640,600 \]`

- Free Cash Flow Multiple:

`\[ \text{Free Cash Flow Valuation} = \text{Free Cash Flow} * \text{Free Cash Flow Multiple} \] \[ \text{Free Cash Flow Valuation} = \$250,400 * 18.00 = \$4,507,200 \]`

- Sales Multiple:

`\[ \text{Sales Valuation} = \text{Sales} * \text{Sales Multiple} \] \[ \text{Sales Valuation} = \$3,510,000 * 1.50 = \$5,265,000 \]`

These different valuation methods provide a range of values for Williams Company in 2022, offering insights into its financial standing and potential market worth.

The complete question is:

(attached)